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The end of the party? - Taking Stock Winter 2018

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We are currently inundated by the mainstream media, calling the end to one of the longest bull runs in history. Similarly, the end of the emerging market (EM) rally has also been trumpeted loudly. And what a rally it was, with EM equities up nearly 40% in US dollars over 2017, well ahead of developed market equities (23%). In addition, money poured into EM bond funds last year, despite the fact that rating agencies rated the quality of EM bonds at the lowest level since 2010.

South African investors, however, can be forgiven for feeling that they have missed the party completely, with the past three years offering dismal returns. Unfortunately, as we all know too painfully, the firing of Pravin Gordhan as finance minister in the first half of last year, by a president effectively gone rogue, and the subsequent stumbling from one self-induced disaster to another, culminating in all but Moody’s declaring our sovereign debt junk, saw us ejected from the party – which takes some doing as emerging markets are a fairly motley crew.

Of course, with the victory of Cyril Ramaphosa in December, we were immediately readmitted, and even being touted by no less than Goldman Sachs, as the ‘hottest emerging market for 2018’. Ratings agencies and lenders, having slated us last year, were suddenly full of hope, investments poured into our bond market, and confidence was slowly breathed into a hitherto dead economy with the promise of growth and jobs to come.

So why then, at mid-year, does it somehow feel like everything’s gone wrong?

Firstly, Trump’s tariffs. What started as a verbal debate, has quickly escalated, with initial tariffs affecting US$50bn of trade, to now potentially US$200bn, with some even predicting it will reach US$1trn. This will raise prices on goods, which means people demand less, and global growth slows – simple economics, but it really scares investors. And suddenly ‘risk on’ becomes ‘risk off’ and out of emerging markets they go. This scenario is beyond our control, and we are being punished along with all the other EMs. In addition, a strong US economy, a strong US dollar and the anticipation of higher than expected rates in the US, have all contributed to foreigners beating a hasty retreat, preferring the promise of an improved yield in the US to the riskier emerging markets.

The second reason everything feels miserable is because we are now, as a country, suffering the after-effects of eight years of corruption, mismanagement and neglect. Failing parastatals, and lack of service delivery and confidence are all unlikely to inspire investors. In addition, it is worth remembering that despite ‘Ramaphoria’ post the ANC’s elective conference, the result was not a ‘Cyril victory’ it was a compromise solution leaning towards Cyril. As a result, there are significant ‘obstructionist’ elements still within government, who are making setting clear policy guidelines, particularly on issues such a mining and land reform, difficult, and a lack of policy clarity runs the risk of overshadowing the Ramaphoria goodwill.

However, it is worth remembering the following:

Global economic growth is strong. So while tariff wars may slow growth, it’s unlikely they’ll destroy it completely. In addition, one has to assume that Trump has a plan, that doesn’t end in a global recession. Generally, he goes in hard at first and then softens – it’s all part of his deal-making style. He did the same with North Korea; hopefully, he’ll do the same with tariffs. After all, he needs strong economic growth, stock markets and employment for re-election, so he has an incentive not to drive the global economy into the ground. Trump’s tax cuts should further fuel earnings and economic growth in the US, and hence the world. A stable developed world should keep emerging markets happy for a while longer.

We need to get the elections out of the way, then the rhetoric will subside significantly.

Back home, we finally have sensible leadership in charge, and whilst the ‘disgruntled’ elements will continue to obfuscate, the President is moving as fast as he can. We need to get the elections out of the way, then the rhetoric will subside significantly. Let’s hope the elections give the President a strong mandate. We don’t want him needing an alliance partner (less than 50% of the vote), or vulnerable (less than 60%), we need him for at least five years, but ten will be even better.

If the above plays out, and the global economy remains stable for the next 12-18 months, and this current weakness turns out to be a pause rather than the end, then at some stage you’ll see investors buying back into SA, strengthening the rand, bringing the petrol price down, and delivering much needed relief and investment returns to South Africans.

Of course, the silver lining above all depends on Trump being sensible, but we can only hope!

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